The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share, and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firm's beta? MV_S = $40(10,000,000) = $400,000,000
MV_M= $60(2,000,000) = $120,000,000

Question

Quizplus · Accepted Answer

The merged firm's beta is calculated by taking a weighted average of the individual betas based on the market values of the firms. Sanafil's market value is $400 million (40 * 10 million), and Matra's market value is $120 million (60 * 2 million). The total market value is $520 million. The merged firm's beta = (1.2 * $400 million + 0.95 * $120 million) / $520 million = 1.14.

The Beta of Sanafil Is 1